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Seller Financing - Lender Liability

Discussion in 'Mortgages & Financing' started by jsmg2006, Mar 7, 2013.

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  1. jsmg2006

    jsmg2006 Law Topic Starter New Member

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    I am selling an investment rental property to another landlord. We have agreed to a purchase price. He will pay 0 down at closing and pay-off the purchase price over several years. I wil have a note and mortgage prepared. The property will be sold and the deed changed to the buyer at closing and the mortgage recorded. Do I as the lender and mortgagee have any liability for claims that occur on or b/c of the property? I know about financial risk of default I am talking about liability if someone gets hurt at property and sues new owner or any similar situation.
     
  2. army judge

    army judge Super Moderator

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    I strongly SUGGEST you consult with an attorney BEFORE you go through with this idea.

    In fact, I wouldn't consummate this deal.

    What you're proposing to do has serious financial and legal repercussions that could impact you dearly.

    What you term "selling" isn't necessarily so, insofar as REAL PROPERTY is concerned.

    By doing what you propose, you could end up GIVING (and not selling) the property.

    Don't do anything, until you have discussed this with YOUR attorney.

    Sure, it might cost you $1,000 (or so), but it could save you hundreds of thousands of dollars and headaches!!!!

    Don't waste time posting more details here, just get to YOUR attorney before you do something very costly and very stupid.
     
  3. jsmg2006

    jsmg2006 Law Topic Starter New Member

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    I actually just got answer from my attorney and he said it would be considered an outright sale and I "shouldn't" have an liability as the lender. Not sure where to go based on you comments now, though.
     
  4. jsmg2006

    jsmg2006 Law Topic Starter New Member

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    This is in the State of NJ if it matters
     
  5. Betty3

    Betty3 Super Moderator

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    I would discuss this only with your attorney & follow his advice.
     
  6. jsmg2006

    jsmg2006 Law Topic Starter New Member

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    Ok, I appreciate the input. Thank you.
     
  7. army judge

    army judge Super Moderator

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    Consider this:

    The buyer gives you ZERO down and agrees to pay you periodically over time.


    You sign over the deed to buyer.


    The buyer dies the next day.


    Who owns the property?


    How do you collect the debt?


    You are selling real property unsecured.


    Banks won't make a car loan without a secured interest in the property.


    Why would you sell real property without retaining a secured interest in the property?


    I suggest you consult with another lawyer.


    Sure, you lessen your liability, by deeding ownership.


    But, you've weakened (if not destroyed) your ability to remedy a default (or non-payment).
     
  8. Betty3

    Betty3 Super Moderator

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    OP, your first post notes: "I know about financial risk of default I am talking about liability if someone gets hurt at property and sues new owner or any similar situation." It seems you know & understand the risks of default but it still wouldn't hurt to talk to another attorney. It's your decision depending on what your concerns are & if you are not satisfied with original attorney's advice.

    I wouldn't want to give you any advice contrary to your attorney's advice.
     
    Last edited: Mar 7, 2013
  9. jsmg2006

    jsmg2006 Law Topic Starter New Member

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    Thank you for the follow-up. Wouldn't the mortgage that I would have prepared and recorded be the secured interest, though? My main goal is to sell the property and get out of the landlord business. I just want to be free of an liability that comes with owning a rental property if I were to sell in this manner. Again, thank you for your thoughts, I will discuss with my attorney.
     
  10. jsmg2006

    jsmg2006 Law Topic Starter New Member

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    I just saw your comment. Thank you for the follow-up. I will start by talking to my attorney tomorrow. Thanks again.
     
  11. jsmg2006

    jsmg2006 Law Topic Starter New Member

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    Thought I'd provide update - spoke to accountant who said as long as financed at IRS minimum AFR of 1.09% the loan would not be a gift. The deal would be at interest of 5% and accountant said that was fine in order to not be a gift.
    Did speak with current attorney who said I should have buyer get insurance (property & liability) on unit and name me as the additional insured with proof once a year of coverage. Attorney said as far as liability he could not forsee and liability for me as the mortgagee; the property would be sold, deed transfered, and all done at a title company who cleared titled (i.e. normal sales process). He said mortgage companies would not get into lending business if they had a liability on all their loans. Also, attorney said loan would be secured by mortgage he would draft and that would be recorded in the county of property being sold. Both accountant and attorney did warn me about buyer defaulting and the financial risk with that. Attorney said buyer's estate would own property if he passed away. Buyer wants to purchase in his company's name and my attorney did recommed that he personally guarantee.
    I thank both of the responders for your comments and would appreciate if you had further insight or comments based on the above with my attorney and accountant. Thank you much.
     
  12. army judge

    army judge Super Moderator

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    You've minimized your risk, but you need to make sure that if the buyer fails to properly ensure the property, you have a way to ensure the property and make him pay.

    Your other concern would go to potential liability, if the buyer were ever to be sued, personally. Is the property insulated from such a lawsuit.

    The last thing to be wary of is buyer default. Sure, you hold the paper, but you've effectively given away thousands of dollars on a person's signature. That isn't wise. If I wanted to unload the building and be worry free, I'd have given it to him for $1.00 (symbolically), because I'd have handed him the dollar back after the sale was completed. I've done it that way in the past.

    Why? because, if he defaults, all it'll do is have the darn thing bounce back to you. If your aim was to unload the property, he'd have bought it for $5,000. Now, you're stuck with paper, and still possessed of some liability.

    Bottom line, what if the guy goes broke? What if he can't pay, or refuses to pay? My first rule of business, never do business with someone who has NO skin on the game!!!!
     
  13. jsmg2006

    jsmg2006 Law Topic Starter New Member

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    I did ask the question about default and my attorney said as the mortgagee I would not have to take possession of property back if I did not want too. I see your point about selling for cash and just being done with property, though. Thank you for the follow-up.
     

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